Factorscan.com. Interview. After having looked in the abyss...
Victor Nosov, Head of the Factoring Department at Promsvyazbank in Russia, talks to Factorscan about new entrants to the market, the state of the Russian factoring market and the major lessons to have emerged from the crisis.
Eurokommerz was an early casualty of the recession, but were there any others? What do you think was the difference between the survivors and the casualties in their structure and/or their methods of trading? Can we expect more casualties?
In the immediate future we are not expecting the withdrawal of any of the large players from the market, but rather are waiting for the entry of new players, as there is room enough for entrants. Besides Eurokommerz, there were more than 100 factors that left the market in 2008-2009. Approximately 60% of those that left are banks that went bankrupt or closed down their factoring units, examples being Lefko-Bank and MDM Bank respectively. The remaining 40% included factors faced with a lack of funding sources, or deprived of support by their parent banks, IFC "Trust" and Stroycredit-factoring being respective examples.
Factoring companies that weren't affiliated with the banks distinguished themselves by an increasing appetite for risk and a high dependence on external funding - predominantly expensive loans. Often the risk management systems of such players had a formal character, but procedures for monitoring the solvency of debtors were often absent. Russia has a weak insurance infrastructure and there is no fully-fledged credit institute, so all risks are either on the factor or their client. Attention to risk-management, or a lack thereof, has therefore become critical to the sustainability of factors.
Those banks that left the market simply did not have enough time to get to understand the product and it was difficult for their branches to gain traction. The management of these banks simply did not understand the differences between factoring and loan procedures. Factoring was constantly included in the product lines within the strategic framework of forming a 'universal bank', with little attention paid to the realities and differences inherent in factoring.
Figures issued by the Russian AFC indicated that the industry achieved growth in the third quarter of 2009. Which product areas account for this growth and have there been products where there has been a decline?
The reason for the growth is simple - most trading companies had no alternative to replenishing their floating assets - especially with the growth of procurement in time for the high season of the 4th quarter. And credit is still barely accessible for trading companies.
There wasn't significant product diversity in Russia's domestic factoring before the crisis, so the changes occurred not in the lines, but inside the products. Examples included changes to discount rates, tariffs and terms of funding.
In the first half of the year, the strengthening of risk management and growth of rates served to slow the market. Portfolios were terminated faster than they could be filled, so the main task was finding high-quality customers with reliable debtors. In the second half of the year they were found, so rates went down and the result was an increase in factoring turnover.
How has the collapse of clients and losses in the portfolio affected factors over the last two years, and how has the industry sought to reduce the impact of the wider economic recession?
Yes, clients and debtors went bankrupt, but these events were largely confined to 2008. There was nothing similar in Promsvyazbank last year. We have strengthened our risk-management systems - a development that has begun to be carried out by all market participants. Surprisingly, and as a result of the crisis, factoring has actually become less risky than bank loans with a collateral pledge.
What new players have entered the market of late? What has attracted them to the Russian factoring market?
Alfa-Bank and 'Vozrozhdenie' started up their own factoring divisions, 'System-factor' - developed by one of the shareholders of the Russian number two retailer 'Magnet' - returned to the market, the Russian Factoring Company entered the market, while VTB Bank is looking to restart its factoring operations. FaktorRus - established by FIMBank, Transcapitalbank and IFC - plans to begin factoring operations by the end of the year. New players have been attracted by non-competitive conditions, the growth potential of the market and growing demand for the product.
How are Russian factors looking to climb out of the recession? What are the key developments within the industry that will give impetus to this recovery?
Factors depend on the state of trade, as wholesale trade accounts for 80% of the market's client base. Last year, for instance, external trade declined by around 40%, and as a consequence the volume of international factoring fell sharply. Russia's international factoring turnover for two-factor operations for example declined four-fold during the downturn.
The main driver of growth will remain the economic situation in the country. The dynamics of the factoring market will depend upon the pace of economic recovery, trade, consumer demand, company profits and the state of its citizens.
Russian factors have already done much to help the economy recover. It is now time for the macroeconomics.
How has the average factoring client changed over the last two years? Is the average client now a better or worse prospect?
In my opinion the ideal client is a supplier of goods with a small turn-around time (foodstuff, fast-moving consumer goods) with large retail chains as debtors. Such clients are always appreciated. Meanwhile, during the crisis, there have been new clients to the bank, who previously did not use the factoring. They are very different clients, from new industries, but it is difficult - as yet - to assess whether they are better or worse prospects for the industry.
How has the product offering developed in recent years and how can product variation buoy up the market?
There haven't been any specific developments regarding products in the market in recent years. Recourse factoring accounts for more than 90% of all operations in Russia. The same situation was much the same before the crisis. Service price is very important for Russian clients, and they therefore choose the cheapest product even if it carries a potential risk. Meanwhile, now that the risk level has decreased, we expect that the non-recourse offering will grow. The major drivers of turnovers will however continue to be concentrated in the recourse factoring segment.
What have been the key lessons that Russian factors have learnt from the crisis and how will these lessons change processes and activities moving forward?
The crisis has markedly reduced Russian factors' appetite for risk. The downturn has hammered home the fact that portfolio credit quality is as important for factors as size.
The second lesson to have emerged from the crisis is that only those players in the market who have the right team, technologies and risk-management systems will survive. Those players that have remained in the market have been obliged to improve their services through the crisis - they have after all looked into the abyss that swallowed up their colleagues. As a consequence, factors continue to reduce risk, invest in IT and improve their service and relationships with customers.
What were the major positives for the industry to emerge in the last two years?
- The level of greed and adventurism displayed by the proprietors, investors and managers of factors has decreased.
- Companies have begun to show greater caution when it comes to risky operations.
- The greatest value was gained through technology, and improving dialogue with clients and debtors. ·
- Market players began discussing specific branch problems and looking to resolve them centrally.
- The concept of 'quality' became a priority.
Does the export of Russian knowledge and expertise into the CIS represent a key opportunity for the industry? Which players do you expect will become involved (or increasingly involved) in neighbouring markets over the next five years?
This question has an ambiguous answer. Stable commercial relations between the countries, developed financial systems, and the absence of legislative barriers are all necessary for the export of factoring from Russia into the post-Soviet space. As of today however, communication between people is better than between the companies of the CIS.
Secondly, losses in many CIS countries outstripped those suffered by Russia during the crisis. And it makes more logical sense to restore the home market before turning to expansion.
Thirdly, the home markets of the CIS countries are comparatively small, meaning Russian factors have placed emphasis upon the development of international factoring operations. But at the same time, it is not always possible to develop operations due to their being too few FCI and IFG members in these countries, and it is safer to enter new markets through the less risky two-factor model.
In my opinion, the export of knowledge and technology from Russia into the CIS will occur in-step with other financing facilities such as syndication, bond issues and corporate crediting. Russian banks, including Promsvyazbank, have representatives in a host of CIS countries, with these offices looking to advance the development of Russian factoring into the CIS over the next five years.